Mendoza Legislature
Mendoza's Senate gave final approval on Tuesday, November 10, to the province's new Hydrocarbons Law, with 31 votes in favor and two against in the vote on the bill as a whole. It approved without amendments the text that the Chamber of Deputies had passed on October 21, with 39 votes in favor and four against.
The law will replace Law 7526, enacted in 2006. It introduces a flexible royalty scheme, incentives to recover production at mature fields and the unconventional production concession, a figure that provincial legislation did not provide for.
According to the provincial government, the aim of the initiative is to strengthen "the basic principles linked to the Province's ownership of its hydrocarbon resources." The new law also updates the regime in light of the productive, technological and regulatory changes of the last two decades, among them the Ley Bases, the national omnibus reform law, which amended National Hydrocarbons Law 17,319.
"The world changed in two decades, in both regulatory and environmental terms," said Mendoza's minister of Energy and Environment, Jimena Latorre.
Legislative Process and the Article 35 Amendment
Mendoza Governor Alfredo Cornejo had previewed the reform in his May 1 address to the Legislative Assembly. On September 18, during the Mendoza Energy Summit, the governor announced that the bill would be sent to the Legislature. The text entered the Chamber of Deputies that same day.
It was presented by Mendoza's minister of Energy and Environment, Jimena Latorre, together with the chamber's president, Andrés Lombardi, and the directors of Hydrocarbons, Lucas Erio, and Legal Affairs, Bruno De Pasquale.
On October 21, Deputies gave the bill first-chamber approval with an amendment to Article 35, promoted by provincial lawmaker Jimena Cogo, who represents Malargüe. Under that article, royalty information will be public and the Province must send it every three months to the municipalities where producing areas are located. The reports will include the applicable rates, production, the amounts settled per area and the reductions granted.
Reference Royalty, Rate Reductions and Fee Offsets
The central change is in royalties. Law 7526 set a general royalty of 12% on production, reducible to as low as 5% depending on each project. For future tenders, the new law establishes a reference royalty of 15%, on which companies may bid higher or lower percentages.
Awards will not depend solely on the royalty offered: the total value of the project, expected production and committed investments will also be assessed. The investment amount will carry preponderant weight in the formula.
The Executive Branch may reduce royalties to reactivate inactive wells, carry out complementary exploration, produce heavy crude and develop enhanced recovery projects. In those cases, with technical justification, rates may fall below 5%.
The law also allows the production fee (canon de explotación) to be partially offset when a company makes new exploration-risk investments, provided it invests at least twice the amount it seeks to offset. In exploration permits, the fee for an extension may be reduced by up to 80%.
For areas without a holder, the Province may sign temporary direct contracts of up to 18 months with Empresa Mendocina de Energía SA (EMESA), Mendoza's provincial energy company, or with local concessionaires, until a public tender is called.
Unconventional Concession and Overlap With Mining Rights
Adding the unconventional production concession enables existing concessions to be converted to that regime, in line with national legislation. The point is relevant for Malargüe, home to the Mendoza lobe of Vaca Muerta. There, projects require larger-scale investment and longer timelines than a mature conventional field.
The law also regulates possible overlaps between mining rights and hydrocarbon projects. As a general principle, both activities must seek to coexist, and overlap alone will not cause either right to lapse. If coexistence proves impossible or creates incompatible risks, the Executive Branch will decide, with the participation of the mining and hydrocarbon authorities and after hearing the parties concerned.
Environmental Liability, Penalty Regime and Oversight Fee
Operators will be responsible throughout the life cycle of fields, from exploration to the closure and abandonment of wells, facilities and pipelines. Those obligations do not expire when a company leaves an area.
In addition, companies must submit every two years a public Sworn Statement of Good Practices (Declaración Jurada de Buenas Prácticas), with information on the environment, community, workforce training, local suppliers, integrity, and health and safety.
Fines will no longer be expressed in pesos and will be calculated by reference to the price of super-grade gasoline (nafta súper). Violations will be classified as minor, serious, very serious and extremely serious.
The law also creates the Hydrocarbon Activity Oversight Fee (Tasa de Control de la Actividad Hidrocarburífera), of up to 0.8% of the amounts corresponding to royalties and fees, to fund inspections and oversight. It also creates a Provincial Registry of Hydrocarbon Activity.
The enforcement authority will be Mendoza's Ministry of Energy and Environment, headed by Jimena Latorre, through the Hydrocarbons Directorate. The Mendoza Tax Administration (ATM) will remain in charge of assessing, auditing and collecting royalties and fees. The law will take effect once it is promulgated and published in the Official Gazette (Boletín Oficial).